Professor Stefan Thomke discusses how past experience and intuition can be misleading when attempting to launch an innovative new product, service, business model, or process. Instead, Booking.com and other innovative firms embrace a culture where testing, experimentation, and even failure are tried and true.
Open for comment; 0 Comment(s) posted.

This study discusses a systematic and persistent lack of female, Hispanic, and African American labor market participation in the innovation sector, through both entrepreneurs and the venture capitalists that fund them.

In a survey of 79 private equity firms managing more than $750 billion in capital, the authors provide granular information on PE managers' practices in determining capital structure, valuing transactions, sourcing deals, governance, and operational engineering. Among the findings, very few investors use DCF or net present value techniques to evaluate investments, relying instead on internal rates of return and multiples of invested capital. This result conflicts with the focus on net present value in most business school finance courses.
Closed for comment; 0 Comment(s) posted.

The more affinity there is between two VCs investing in a firm, the less likely the firm will succeed, according to research by Paul Gompers, Yuhai Xuan and Vladimir Mukharlyamov.
Closed for comment; 8 Comment(s) posted.

In venture capital, friendship can be expensive. Using the VC industry as a testing ground, the authors seek to answer two questions about collaboration: What personal characteristics influence individuals' desires to work together in venture capital syndication? And given the influence of these personal characteristics, does attraction help or hurt investment performance? After examining the biographical characteristics and activities of more than 3,500 individual venture capitalists from 1975 to 2003, the authors show that people are more likely to collaborate with those who share similar characteristics with them. Findings also show that individual venture capitalists collaborate with other venture capitalists for both ability- and affinity-based characteristics. When they collaborate for ability-based characteristics it enhances investment performance; but when they partner for affinity-based characteristics it dramatically reduces investment returns. Key concepts include: It is costly for "birds of a feather" to flock together for reasons other than ability. Collaborating for ability-based characteristics enhances investment performance. But collaborating due to shared affinities dramatically reduces the probability of investment success. The probability of a successful exit outcome decreases by 18 percent if two venture capitalists who previously worked at the same company partner up in the syndication. The likelihood of success drops by 22 percent if co-investors attended the same undergraduate school. The negative effect of shared affinity is even stronger when it relates to ethnicity: Collaborating with someone from the same ethnic minority group comes at the expense of a 25 percent reduction in performance. This research contributes to the study of working groups, the success implications of social ties, and the ability of venture capitalists to add value.
Closed for comment; 0 Comment(s) posted.

From Silicon Valley to Herzliya, Israel, venture capital firms are concentrated in very few locations. More than half of the 1,000 venture capital offices listed in Pratt's Guide to Private Equity and Venture Capital Sources are located in just three metropolitan areas: San Francisco, Boston, and New York. More than 49 percent of the U.S.-based companies financed by venture capital firms are located in these three cities. This paper examines the location decisions of venture capital firms and the impact that venture capital firm geography has on investments and outcomes. Findings are informative both to researchers in economic geography and to policymakers who seek to attract venture capital. Key concepts include: The success rate of venture capital investments in a region is an important determinant of venture capital firms' decisions to open new branches. While venture capital firms in San Francisco, Boston, and New York City outperform, their outperformance is not driven by local investments. While their performance in investments everywhere is better than that of their peers based in different cities, the outperformance is particularly striking outside the cities where they have offices. Interestingly, some of the performance disparity between local and nonlocal investments disappears when a venture firm does more than one investment in a region, suggesting that as the marginal monitoring cost falls, venture capital firms may reduce their expected success rate for investment in a distant geography.
Closed for comment; 0 Comment(s) posted.

Want to be a successful entrepreneur? Your best bet might be to partner with entrepreneurs who have a track record of success, suggests new research by Paul A. Gompers, Josh Lerner, David S. Scharfstein, and Anna Kovner. Key concepts include: Previously successful entrepreneurs are significantly more likely to lead successful new ventures than first-timers or those who previously failed. Successful entrepreneurs are adept at selecting the right industry and time to start new ventures. Suppliers and customers are more likely to back a person with previous successes.
Closed for comment; 0 Comment(s) posted.

All else equal, a venture-capital-backed entrepreneur who starts a company that goes public has a 30 percent chance of succeeding in his or her next venture. First-time entrepreneurs, on the other hand, have only an 18 percent chance of succeeding, and entrepreneurs who previously failed have a 20 percent chance of succeeding. But why do these contrasts exist? Such performance persistence, as in the first example, is usually taken as evidence of skill. However, in the context of entrepreneurship, the belief that successful entrepreneurs are more skilled than unsuccessful ones can induce real performance persistence. In this way, success breeds success even if successful entrepreneurs were just lucky. Success breeds even more success if entrepreneurs have some skill. Key concepts include: There is evidence for the role of skill as well as the perception of skill in inducing performance persistence.
Closed for comment; 0 Comment(s) posted.

The acquisition of new capabilities through the purchase of small venture capital-backed start-ups is a strategy that has been employed by many large technology firms including Cisco, Microsoft, Google, and EMC. Young venture capital-backed companies, for their part, often develop innovative technologies that can be exploited by existing technology companies. The value inherent in these start-ups is typically tied up in the intellectual property or human capital that has been developed during the early stages of the company's life. The opportunity to acquire valuable intangible assets, however, is balanced by the difficulty in assessing the value of the underlying assets. Unlike purchasing companies with substantial operating profits and a long track record of sales, the ability to fully assess the prospects of intangible assets is subject to substantial asymmetric information and uncertainty. This paper explores mechanisms for limiting the asymmetric information that potentially plagues the acquisition of young venture capital-backed companies. The results also shed light on the value that venture capitalists add to their portfolio companies as well as to companies in their venture capital network. Key concepts include: In the bridge-building alternative presented here, the personal relationship between the two firms is critical to conveying value-relevant information about both the target and the acquiring firm. The venture capital investor link between the acquirer and the target has a strong effect on how the purchase transaction is structured, how the market reacts to the announcement of the acquisition, and how the acquirer performs in the stock market in the long run. Recruitment of management and the identification of first-time customers may be improved through bridge building networks that the venture capitalist creates. Bridge building may be important in relationships with service providers and strategic partners.
Closed for comment; 0 Comment(s) posted.

In The Money of Invention: How Venture Capital Creates New Wealth, HBS professors Paul Gompers and Josh Lerner demystify the role VC plays in the economy. Read an excerpt. Plus: Q&A with the authors.
Closed for comment; 0 Comment(s) posted.

Corporate-sponsored venture capital funds do not have to fail. But as HBS professors Paul Gompers and Josh Lerner explain, hybrid organizations such as Xerox Technology Ventures face considerable challenges on the road to success.
Closed for comment; 0 Comment(s) posted.

Despite many success stories and a rapid rise to prominence, the venture capital industry remains a mystery to most, and questions about its sustainability persist. In this excerpt from their pathbreaking book The Venture Capital Cycle, HBS Professors Paul Gompers and Josh Lerner look toward the future of this misunderstood financial intermediary.
Closed for comment; 0 Comment(s) posted.